dividend investing - All posts tagged dividend investing

A lot of big asset managers and brokerages focused on efficient return of capital during their third-quarter earnings reports, which makes Jefferies believe that special dividends are afoot.

In a note out today, Daniel Fannon writes that with the overhang of the election finally settled, companies like Franklin Resources (BEN), Waddell & Reed Financial (WDR), CBOE Holdings (CBOE), CME Group (CME) and GFI Group (GFIG) “have the potential to declare and distribute special dividends prior to year end given strong balance sheets and the potential for changes in tax legislation.”

He notes that Federated Investors (FII) has already declared a $1.50 special dividend.

Still, Fannon notes that investors shouldn’t get too excited: “In determining the size of the dividend, most are likely to be relatively conservative and not draw down cash to the maximum extent possible. For example, while BEN has the ability to return roughly $1.5B as a special dividend, it is much more likely to return only a portion of this, probably no more than half given the company’s historical pattern.”

He also writes that companies including BlackRock (BLK) and T.Rowe Price (TROW) are unlikely to alter their dividend policies, even though they have the resources to declare a special dividend.

For Franklin, Fannon expects a special dividend of $2 to $3 a share, while he estimates Waddell & Reed will declare one between 25 cents and 75 cents a share. Among the brokerages, Fannon sees CBOE declaring between 50 cents and $1, CME between $1.25 and $1.50 and GFI between 5 and 10 cents.

After the big success of the PowerShares S&P 500 Low Volatility Portfolio (SPLV), the firm is launching the PowerShares S&P 500 High Dividend Portfolio (SPHD) on Thursday. Here’s the prospectus, which shows an expense ratio of 0.30%.

The index picks the last 12 months’ 50 least volatile stocks from the group of the 75 highest dividend payers in the S&P 500. There’s a max of 10 stocks per sector. The stocks with the heftiest dividends get the highest weighting in the fund:

S&P identifies from the S&P 500® Index the 75 securities with the highest dividend yields over the past 12 months, with no one sector within the S&P 500® Index allowed to contribute more than 10 securities. From those securities, S&P selects for inclusion in the Underlying Index the 50 securities with the lowest volatility over the past 12 months. Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations (increases or decreases in a stock’s price) over time. The Index Provider weights each of the constituent securities in the Underlying Index by its dividend yield, with the highest dividend-yielding securities receiving the highest weights. The Fund generally invests in all of the securities comprising its Underlying Index in proportion to their weightings in the Underlying Index.

Stay tuned. We’ll have more on what the ETF will hold and whether the problem of unintended exposures also crops up in this product, as analysts at Axioma have argued is a problem in SPLV. From our March 24 column on the subject:

That’s been enticing for investors seeking shelter from market swings like last August’s; they’ve plunked $1.6 billion into the fund over about 10 months, and they’ve kept pouring in this year, even though the fund is up only 1.5% year to date.

However, screening for staid, stable stocks can bring its own quirks. Anthony A. Renshaw of risk-modeling firm Axioma unpacked the fund’s holdings to discover a few predictable issues—and a few that were surprising.

Unsurprisingly, the fund has a heavy bias toward the consumer staples and utilities sectors, which together make up more than half of the ETF as of this month. That means that investors are making sector bets by buying into this fund, whether they realize it or not.

But the fund also lacks a number of the S&P 500′s very large companies like Chevron (CVX), effectively giving it a bias against massive companies. It also has what Renshaw says is a healthier-than-expected dose of companies that prefer a strong U.S. dollar.

The larger issue may be that investors who seek out low-volatility stocks are at risk of lumping together companies whose shares aren’t budging lately for a range of very different reasons, not all of which are permanent.

For instance, while some companies’ stocks may always be shelters in a storm, others may simply have withstood 2011′s market downdraft for idiosyncratic reasons that won’t be repeated, like banner earnings or buybacks. …

Axioma’s own aim in publishing the study is to push “purified factor ETFs” that strive to control for such issues. But it should be clear even to investors who’ve never considered the matter that there’s likely no magic ETF recipe for ridding their portfolios of market volatility.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.